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News : Global Economy Last Updated: Jan 2, 2014 - 6:45 AM


Corporate tax reform and the biggest tech tax havens
By Michael Hennigan, Finfacts founder and editor
Dec 31, 2013 - 7:12 AM

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In January 2013, Will Morris, director of Global Tax Policy at General Electric Co., the US business giant, wrote a 'Dear Pascal' letter to Pascal Saint-Amans, head of the Center for Tax Policy at The Organisation for Economic Co-operation and Development (OECD), a Paris-based think-tank for the governments of 34 mainly developed economies, including Ireland. The letter was about proposed changes on what is termed 'Permanent Establishment' (PE), which would have the effect of "fundamentally changing" the tax rules that would apply to high tech companies in particular.

Will Morris' 14-page letter [pdf] was issued in his capacity as head of the Business and Industry Advisory Committee (BIAC) lobby group and the words 'concern,' 'concerns' and 'concerned' were used 30 times.

What has been dramatic since the Morris letter is the speed in which the sands moved under the feet of the beneficiaries of an out-of-control international tax system. Commitments from the leaders of the 19 leading developed and emerging economies in the G-20 to tackling massive corporate tax avoidance, will have the effect of  "fundamentally changing" the status quo for the international tax industry and the politicians that facilitate them.

While US companies are the most prominent in corporate tax avoidance and evasion, the US government is leading the international campaign against personal tax evasion.

In 2009, UBS, the Swiss banking giant, admitted that it aided US taxpayers to hide money abroad. UBS paid $780m in fines and turned over the names of more than 4,000 US taxpayers with accounts to settle US charges, effectively ending decades of Swiss bank secrecy. This week it was disclosed that more than half of Switzerland’s 300 cantonal banks (mid-size to small) have chosen to take part in a US disclosure programme to identify undeclared US assets under the terms of the Swiss-US tax deal signed in August.

Swiss banks are sending letters to current or former US clients warning that information about their accounts will be soon turned over to the IRS (US Internal Revenue Service).

In a special report last July on corporate tax avoidance, Reuters said the tactic of having a 'Permanent Establishment' (PE) in a jurisdiction other than a main area of business is termed by the OECD an "artificial avoidance of PE status," and it wants to change things so the international tax system more closely resembles economic reality. It aims to tweak the guidelines - - which countries including Germany, the UK and France want to change - - so that countries where companies make lots of money can claim a commensurate share of tax.

Reuters says  that many firms especially in tech, where they can easily operate across borders, use the tactic. Reuters analysed the accounts of the top 50 US software, internet and computer hardware companies by market capitalization and found that PE structures that help them avoid tax are currently used by 74% of them.

"Sixteen of the 20 biggest US software companies by market value, including Microsoft, Adobe and Citrix, do not declare tax residences for their main businesses in their major European markets, their accounts show. Instead, they report software sales in Ireland, Switzerland and the Netherlands, countries which have smaller populations and offer lower corporate tax rates."

OECD: Base Erosion and Profit Shifting

Top 5 US tech firms held $515bn in cash at end June 2013

Finfacts: US company profits per Irish employee at $970,000; Tax paid in Ireland at $25,000

Check out our subscription service, Finfacts Premium , at a low annual charge of €25

Reuters: The biggest tech tax havens

Said Business School, Oxford, April 2013: Pascal Saint-Amans (director, Centre for Tax Policy and Administration, OECD) illustrates how the OECD Base Erosion and Profit Shifting (BEPS) project studies whether and why the current corporate tax system allows for the allocation of taxable profits to locations different from those where the actual business activity takes place. The aim of the project is to provide complete and effective policies for countries to combat base erosion and profit shifting.

Said Business School, Oxford, April 2013: Will Morris (director, Global Tax Policy, GE) advocates incremental changes to the corporate income tax system to attain a more sustainable, sensible system. He also stresses the need for quick action and collaboration among business, governments and the OECD to address the problems in the current international corporate tax system.

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